Financial Management Report Sample
Business Management, Essay APC308.
Question 1 – Dividend Policy
Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part of dividend policy. Drawing on the dividend policy literature critically discuss some of the factors that need to be considered by senior managers of a listed company when deciding on:
a) the size of the annual dividend to return to its shareholders (12 marks)
b) and the practical issues that need to be considered when deciding on (12 marks) the size of the dividend payment.
Squeezeco is currently deciding on the level and form of its next dividend. It is considering three options:
i. A cash dividend payment of 15p per share
ii. A 5% scrip dividend
iii. A repurchase of 15 % of ordinary share capital at the current market price
d) Critically discuss how the company’s decision will be influenced by the (10 marks) opportunity to invest £70m in a project with a positive net present value.
Question 2 – Mergers and Takeovers
The managing directors of Aztec are considering what value to place on Trojan plc, a company that they are planning to take near in the near future. Aztec’s plc’s share price is currently £3.89 and the company’s earning per share stand at 21p. Aztec’s weighted average cost of capital is 9%.
The board estimates that annual after tax synergy benefits resulting form the takeover will be £4.35m, that Trojans’ distributable earnings will grow at an annual rate of 2% and that duplication will allow the sale of the £21m of assets, net of corporate tax (currently standing at 20%), in a years time.
d) Drawing on the mergers and takeovers literature, critically discuss (20 marks) the problems associated with using the above valuation techniques and based on this which of the above you would recommend the board of Aztec to use